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Saturday, October 23, 2010

Romer: Now Isn’t the Time to Cut the Deficit

Christina Romer doesn't even bother to try to make an argument for additional fiscal intervention with an eye toward job creation. She has, apparently, given up all hope that fiscal policymakers will provide the additional help that the economy needs. Instead, she is doing her best to prevent Congress from making things worse:

Now Isn’t the Time to Cut the Deficit, by Christina Romer, Commentary, NY Times: The clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder.
Make no mistake: persistent large budget deficits are a significant problem. ... And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.
Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. ... Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.
Some advocates of austerity argue that ... fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially. ...
Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force. Such a situation would be terrible for both the affected workers and the long-run budget situation. ...
Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately. ...
While immediate fiscal tightening isn’t wise for the United States, we do need to address the deficit. The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. ... History shows that well-designed backloaded plans are credible. ...
Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful. More important, showing that policy makers can come together and make essential decisions about our fiscal challenges would reassure all Americans that our economic future is better than the current grim reality.

    Posted by on Saturday, October 23, 2010 at 03:24 PM in Budget Deficit, Economics, Fiscal Policy, Politics | Permalink  Comments (52)


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